While freezing the lifetime allowance at £1,073,100 until 2026 allows the Treasury to kick pension tax reform down the road, employers need to manage the retirement expectations of mainly their higher earners and executives. However this may also impact on those on a more modest salary if they have defined benefit (DB) pension benefits. The key way to do this is through education.
The lifetime allowance is the maximum pension fund that can be built up and taken tax efficiently from a HM Revenue and Customs (HMRC) registered pension scheme. There is currently an inequality between how the lifetime allowance applies to DB pension savings compared to defined contribution (DC), even though there is the same lifetime allowance figure for both. This is because with the DB pension savings the lifetime allowance ‘buys’ someone more pension, as it is adjusted actuarially to represent the value of the individual’s DB pension fund. For DC members, the lifetime allowance is simply the value of the individual’s DC pension fund, so if investment returns are higher than expected the individual can end up paying the penal lifetime allowance charge set at 55% through no real fault of their own.
Most senior executives are probably already aware of the pension difficulties surrounding the lifetime allowance and have their own strategy for dealing with this, including potentially registering for HMRC fixed protection 2016 which gives head room to £1.25 million, and asking for top-up salary if they have maxed out on their pension savings.
Lower earners with only the automatic enrolment level of pension contributions are not likely to have be concerned about the lifetime allowance but everyone in between should monitor their pension savings and keep up to date with what the latest lifetime allowance is, as well as the annual allowance which also restricts an individual’s pension fund. This is no different to monitoring other tax limits like inheritance tax and planning accordingly.
Penny Cogher is partner at Irwin Mitchell